Pension Obligations

In December of 2016, the California Public Employees’ Retirement System Board (CalPERS) voted to lower the expected investment return rate from 7.35% to 7% by 2020. This decision was made after the return on investment failed to meet the 7.5% goal in both 2015 and 2016. Overall, the $300 billion fund is cash negative meaning it pays out more in benefits than it collects. The reduction in expected returns will have a direct impact on governments in California.

Currently Sierra Madre’s total pension liability is $10,678,000 and the City is approximately 75% funded. Sierra Madre, like all California cities, pays down its pension liability with a charge known as an Unfunded Accrued Liability (UAL). The reduction in forecasted investment returns by the CalPERS means the UAL paid by Sierra Madre will increase dramatically.

Figure 1, below, shows the expected annual increases of UAL payments for the General Fund:

At its peak in 2020-2021 payments to the City’s pension will exceed $1.2 million annually—an increase of 68% over the pension payment in 2016-2017.

The CalPERS board meets annually to discuss forecasted returns. It is likely investment returns will be lowered again, meaning direct increases will be mandated to Sierra Madre.